TD Bank 2010 Annual Report Download - page 12

TD BANK GROUP ANNUAL REPORT 2010 MANAGEMENT’S DISCUSSION AND ANALYSIS10
1
Adjusted non-interest income excludes the following items of note: 2010 – $9 million
pre-tax loss due to change in fair value of credit default swaps (CDS) hedging the
corporate loan book, as explained in footnote 10; $14 million pre-tax gain due to
change in fair value of derivatives hedging the reclassified available-for-sale debt
securities portfolio, as explained in footnote 8; $25 million recovery of insurance
claims, as explained in footnote 12; 2009 – $196 million pre-tax loss due to change
in fair value of CDS hedging the corporate loan book; $564 million pre-tax loss due
to change in fair value of derivatives hedging the reclassified available-for-sale debt
securities portfolio; 2008 – $186 million pre-tax gain due to change in fair value of
CDS hedging the corporate loan book; $141 million pre-tax gain due to change in
fair value of derivatives hedging the reclassified available-for-sale debt securities
portfolio; $30 million pre-tax loss due to provision for insurance claims, as explained
in footnote 15.
2
Adjusted provisions for credit losses exclude the following items of note: 2010 –
$59 million release in general allowance for credit losses in Canadian Personal and
Commercial Banking and Wholesale Banking, as explained in footnote 13; 2009 –
$255 million increase in general allowance for credit losses in Canadian Personal
and Commercial Banking and Wholesale Banking; 2008 – $17 million due to change
in fair value of CDS hedging the corporate loan book, as explained in footnote 10.
3
Adjusted non-interest expenses exclude the following items of note: 2010 –
$592 million amortization of intangibles, as explained in footnote 6; $108 million
in integration and restructuring charges relating to U.S. Personal and Commercial
Banking acquisitions, as explained in footnote 9; 2009 – $653 million amortization
of intangibles; $429 million integration and restructuring charges relating to the
Commerce acquisition; settlement of TD Banknorth shareholder litigation of
$58 million, as explained in footnote 14; $55 million Federal Deposit Insurance
Corporation (FDIC) special assessment charge, as explained in footnote 15; 2008 –
$577 million amortization of intangibles; $111 million integration and restructuring
charges relating to the Commerce acquisition; $477 million positive adjustment
related to the reversal of Enron litigation reserve, as explained in footnote 7.
4 For reconciliation between reported and adjusted provision for income taxes,
see the ‘Non-GAAP Financial Measures – Reconciliation of Reported to Adjusted
Provision for Income Taxes’ table in the “Taxes” section.
5
Adjusted equity in net income of associated company excludes the following items
of note: 2010 – $72 million amortization of intangibles, as explained in footnote 6;
2009 – $68 million amortization of intangibles; 2008 – $66 million amortization
of intangibles.
6
Amortization of intangibles primarily relates to the Canada Trust acquisition in
2000, the TD Banknorth acquisition in 2005 and its privatization in 2007, the
Commerce acquisition in 2008, the acquisitions by TD Banknorth of Hudson United
Bancorp (Hudson) in 2006 and Interchange Financial Services (Interchange) in
2007, and the amortization of intangibles included in equity in net income of
TD Ameritrade.
7
The Enron contingent liability for which the Bank established a reserve was re-
evaluated
in light of the favourable evolution of case law in similar securities class
actions following the U.S. Supreme Court’s ruling in Stoneridge Partners, LLC v.
Scientific-Atlanta, Inc. During the fourth quarter of 2008, the Bank recorded a
positive adjustment of $323 million after tax, reflecting the substantial reversal of
the reserve.
8
Effective August 1, 2008, as a result of deterioration in markets and severe dislo-
cation in the credit market, the Bank changed its trading strategy with respect
to certain trading debt securities. The Bank no longer intends to actively trade in
these debt securities. Accordingly, the Bank reclassified certain debt securities
from trading to the available-for-sale category in accordance with the Amendments
to the Canadian Institute of Chartered Accountants (CICA) Handbook Section
3855, Financial Instruments – Recognition and Measurement. As part of the Bank’s
trading strategy, these debt securities are economically hedged, primarily with
CDS and interest rate swap contracts. This includes foreign exchange translation
exposure related to the debt securities portfolio and the derivatives hedging it.
These derivatives are not eligible for reclassification and are recorded on a fair
value basis with changes in fair value recorded in the period’s earnings. Manage-
ment believes that this asymmetry in the accounting treatment between derivatives
and the reclassified debt securities results in volatility in earnings from period
to period that is not indicative of the economics of the underlying business
performance in the Wholesale Banking segment. As a result, the derivatives are
accounted for on an accrual basis in Wholesale Banking and the gains and losses
related to the derivatives in excess of the accrued amounts are reported in the
Corporate segment. Adjusted results of the Bank exclude the gains and losses
of the derivatives in excess of the accrued amount.
9
As a result of U.S. Personal and Commercial Banking acquisitions and related
integration and restructuring initiatives undertaken, the Bank may incur integration
and restructuring charges. Restructuring charges consisted of employee severance
costs, the costs of amending certain executive employment and award agreements,
contract termination fees and the write-down of long-lived assets due to impair-
ment. Integration charges consisted of costs related to employee retention, external
professional consulting charges, marketing (including customer communication
and rebranding), and integration-related travel costs. Beginning in Q2 2010, U.S
Personal and Commercial Banking has elected not to include any further Commerce
related integration and restructuring charges in this item of note as the efforts
in these areas wind down and in light of the fact that the integration and restruc-
turing is substantially complete. For the twelve months ended October 31, 2010,
the integration charges were driven by the FDIC-assisted and South Financial
acquisitions and there were no restructuring charges recorded.
10
The Bank purchases CDS to hedge the credit risk in Wholesale Banking’s corporate
lending portfolio. These CDS do not qualify for hedge accounting treatment and
are measured at fair value with changes in fair value recognized in current period’s
earnings. The related loans are accounted for at amortized cost. Management
believes that this asymmetry in the accounting treatment between CDS and loans
would result in periodic profit and loss volatility which is not indicative of the
economics of the corporate loan portfolio or the underlying business performance
in Wholesale Banking. As a result, the CDS are accounted for on an accrual basis
in Wholesale Banking and the gains and losses on the CDS, in excess of the
accrued cost, are reported in the Corporate segment. Adjusted earnings exclude
the gains and losses on the CDS in excess of the accrued cost.
11
This represents the impact of scheduled changes in the income tax statutory rate
on net future income tax balances.
12
The Bank accrued an additional actuarial liability in its insurance subsidiary opera-
tions for potential losses in the first quarter of 2008 related to a court decision
in Alberta. The Alberta government’s legislation effectively capping minor injury
Non-GAAP Financial Measures − Reconciliation of Adjusted to Reported Net Income
Operating results – adjusted
(millions of Canadian dollars) 2010 2009 2008
Net interest income $ 11,543 $ 11,326 $ 8,532
Non-interest income1 8,020 7,294 5,840
Total revenue 19,563 18,620 14,372
Provision for credit losses2 1,685 2,225 1,046
Non-interest expenses3 11,464 11,016 9,291
Income before provision for income taxes, non-controlling interests in subsidiaries,
and equity in net income of associated company 6,414 5,379 4,035
Provision for income taxes4 1,387 923 554
Non-controlling interests in subsidiaries, net of income taxes 106 111 43
Equity in net income of an associated company, net of income taxes5 307 371 375
Net income – adjusted 5,228 4,716 3,813
Preferred dividends 194 167 59
Net income available to common shareholders – adjusted 5,034 4,549 3,754
Adjustments for items of note, net of income taxes
Amortization of intangibles6 (467) (492) (404)
Reversal of Enron litigation reserve7 – – 323
Increase (decrease) in fair value of derivatives hedging the reclassified available-for-sale debt securities portfolio8 5 (450) 118
Integration and restructuring charges relating to U.S. Personal and Commercial Banking acquisitions9 (69) (276) (70)
Increase (decrease) in fair value of credit default swaps hedging the corporate loan book,
net of provision for credit losses10 (4) (126) 107
Recovery of (provision for) income taxes due to changes in statutory income tax rates11 11 – (34)
Release (provision) for insurance claims12 17 – (20)
General allowance release (increase) in Canadian Personal and Commercial Banking and Wholesale Banking13 44 (178) –
Settlement of TD Banknorth shareholder litigation14 – (39) –
FDIC special assessment charge15 – (35) –
Agreement with Canada Revenue Agency16 (121) – –
Total adjustments for items of note (584) (1,596) 20
Net income available to common shareholders – reported $ 4,450 $ 2,953 $ 3,774
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
TABLE 2